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About Chris Folkman

Director, Model Product Management, RMSChris Folkman is responsible for the strategic development of the RMS terrorism model, as well as all casualty models across the company’s suite of products. Chris has 12 years of insurance industry experience gained from roles in broker and carrier insurance companies, where he has led many aspects of property and casualty operations including pricing, underwriting, predictive analytics, regulatory affairs, and third-party commercial coverage and claims. Prior to joining RMS, Chris was Managing Director at CompWest Insurance Company, a workers' compensation startup that was acquired in 2007 by Blue Cross Blue Shield of Michigan. Chris holds a BA in international relations from Stanford University. He is a licensed insurance broker and a Chartered Property and Casualty Underwriter (CPCU).

As Hurricane Harvey barreled eastward from Houston, Port of Houston officials spoke of restarting operations by Labor Day (Monday, September 4) after its channels are checked for shoaling and obstructions. The eighth busiest container port in the U.S. reported no major damage to its terminals, warehouses or storage facilities, and traffic was diverted to other regional ports and processing facilities away from the storm’s path. Maritime officials, it seems, have learned lessons from Superstorm Sandy, where cargo was hastily unstacked in anticipation of high winds before a devastating storm surge caused extensive damage to cargo, chassis, and port warehouses.

What a difference a week makes. A week before the tragic events in Manchester, RMS was in New York, and the previous week in London as we hosted over 400 risk professionals from across the (re)insurance industry at two half day terrorism seminars. The seminars featured several of the world’s leading experts on counterterrorism, modeling, and terrorism risk management and highlighted the fluid threat environment, its insurance implications, and the impact of technology on terrorism risk. Continue reading →

In the 15 years since the terrorist attacks of September 11, 2001, partnerships between the public sector and private industries have yielded more effective security and better public awareness about the threat of terrorism. We may never come to terms with the sheer volume of human loss from that day and among the hundreds of attacks that continue every year. But we have achieved greater resilience in the face of the ongoing realities of terrorism – except for when it comes to looking ahead at recovering from the catastrophic costs for rebuilding in its aftermath.

Terrorism insurance is facing a structural crisis: hundreds of terrorist attacks occur annually, but actual insurance payouts have been negligible. The economic costs of terrorism have skyrocketed, but demand for terrorism coverage has remained relatively flat. And despite a proliferation of catastrophe bonds and other forms of alternative capital flooding into the property insurance market, relatively little terrorism risk has been transferred to the capital markets. If terrorism insurance – and the insurers who provide it – are to remain relevant, they must embrace the new tools and data available to them to create more relevant products, more innovative coverages, and new risk transfer mechanisms that address today’s threat landscape.

The September 11th, 2001 attacks rank among the largest insurance losses in history at $44 billion, putting it among catastrophes with severe losses such as Hurricane Katrina ($70 billion), the Tohoku earthquake and tsunami ($38 billion), and Hurricane Andrew ($25 billion).

But unlike natural catastrophes, whose damages span hundreds of kilometers, most of the 9/11 damages in New York were concentrated in an area of just 16 acres. Such extreme concentration of loss caused a crisis in the insurance marketplace and highlighted the difficulty of insuring against such a peril.

Following the events of the September 11 attacks, most insurers subsequently excluded terrorism from their policies, forcing the U.S. government to step in and provide a backstop through the Terrorism Risk and Insurance Act (2002). Terrorism insurance has become cost effective as insurer capacity for terrorism risk increased. Today there are an estimated 40 insurers providing it on a stand-alone basis, and it is bundled with standard property insurance contracts by many others.

But despite better data on threat groups, more sophisticated terrorism modeling tools, and increased transparency into the counter-terrorism environment, terrorism insurance hasn’t changed all that much in the past 15 years. The contractual coverage is the same – usually distinguishing between conventional and CBRN (chemical, biological, radiological, and nuclear) attacks. And terrorism insurance take-up remains minimal where attacks occur most frequently, in the middle east and Africa, highlighting what policymakers refer to as an increasing “protection gap.”

Closing this gap – through new products, coverages, and risk transfer schemes – will enable greater resilience following an attack and promote a more comprehensive understanding of the global terrorism risk landscape.

As a guiding principle about where marine insurers are exposed to the highest potential losses, it seems reasonable enough. But in fact, as RMS research has proven this week, this proposition may be a bit misleading. Surprisingly, a port’s size and its catastrophe loss potential are not strongly correlated.

Take the Port of Plaquemines, LA which is just south-east of New Orleans. It is neither well known nor big in comparison with others around the world. Yet it has the third highest risk in the world of insurance loss due to catastrophe: our analysis revealed its 500-year marine cargo loss from hurricane would be $1.5 billion.

Plaquemines is not an isolated case. There were other smaller ports in our ranking: Pascagoula, MS in the United States ranks 6 on our list with a potential $1 billion marine cargo loss due to storm surge and hurricane; Bremerhaven in Germany (ranked 4th at $1 billion) and Le Havre in France (ranked 10th at $0.7 billion).

Asia-Pacific ports featured less frequently, but worryingly one Asia port topped the list: Nagoya, Japan was number 1 ($2.3 billion potential losses) with Guangzhou, China a close second ($2 billion). Our analysis modeled risk posed by earthquake, wind, and storm surge perils in a 500-year return period across 150 ports – the top ten results are further down this blog.

Our analysis demonstrates what we at RMS have long suspected: outdated marine risk modeling tools and incomplete data obscure many high-risk locations, big and small. These ports are risky because of the natural perils they face and the cargos which transit through them, as well as the precise way those cargos are stored. But many in the marine sector don’t have these comprehensive insights. Instead they have to make do with a guessing game in determining catastrophe risk and port accumulations. And with the advanced analytics available in 2016 this is no longer good enough.

Big Port or Small – Risk Can Now Be Determined

Back to that seemingly simple proposition about the relationship between port size and insurance risk which I began this blog with. As the table above demonstrates, smaller ports can also present a huge risk.

But the bigger ships and bigger ports brought about by containerization have led, overall, to a bigger risk exposure for marine insurers. Not least because larger vessels have rendered many river ports inaccessible forcing shippers to rely on seaside ports, which are more vulnerable to hurricanes, typhoons, and storm surge.

The value of global catastrophe-exposed cargo is already huge and is likely to keep growing. But the right tools, which use the most precise data, can reveal where the risk of insurance loss is greatest. Leveraging these tools, (re)insurers can avoid dangerous cargo accumulations and underwrite with greater confidence.

Which means that, at last, the guessing game can stop.

In a box: Our ranking of high risk ports used the new RMS Marine Cargo Model™, with geospatial analysis of thousands of square kilometers of satellite imagery across ports in 43 countries. RMS’ exposure development team used a proprietary technique for allocating risk exposure across large, complex terminals to assess the ports’ exposure and highlight the risk of port aggregations. The model took into account:

The smoke from nearby forest fires drifting across the entrance to the Port of Singapore wasn’t unduly worrying the captain of Titan, arriving from Shanghai with 10,000 containers on board. He had clocked the oil tanker off his starboard side and was content that, after obviously having a few navigational hiccups, the pilot of that vessel was now holding a course and speed safely out of Titan’s way. It was as he relaxed back in his chair and looked out across the bow that the smoke thinned out and he saw it. Another tanker. Huge. Q­max class carrying liquefied natural gas.

This is not the plot of a blockbuster book or the climactic scene of a Hollywood disaster movie. It is one of a number of plausible scenarios in the new RMS report on the challenges facing insurers because of the huge growth in marine cargo.

The report “Marine Cargo Catastrophe Modeling: Navigating the Challenges, Charting the Opportunities” examines the outdated techniques and incomplete data that marine insurers have had to make do with in order to estimate their cargo cat risk and port accumulations. Put simply, for too long knowing how much exposure they’ve built up in enormous international ports has been a guessing game. And two recent CAT events, which caused multibillion dollar losses because of huge concentrations of cargo, have exposed this weakness to an uncomfortable scrutiny.

The risks of global trade

Whereas the risks for land or property are essentially static, cargos are constantly moving and so the risk variables might seem unfathomably complicated. It’s not just the number of ports the vessel will go through and the CAT­ risks in those locations: hurricanes, storm surges, earthquakes, and terrorist attacks. Consideration needs to be given to the geology in that region, the construction of the ports in that country, and the level of disaster­ preparedness that exists.

As we saw during Superstorm Sandy, loss outcomes can be influenced by factors such as the exact location of cargo storage (In containers? In warehouses? Stacked?). Equally important is the vulnerability of the products. Are they fragile like electronics (ruined by water) or more resilient like jewelry (which can more easily be salvaged)?

The new RMS report in combination with the soon-to-be launched RMS Marine Cargo Model will bring clarity to these issues.

A purpose-built model for the industry

The RMS Marine Cargo and Specie model will be generally available this May, with the launch of RiskLink version 16.

To develop the model, the RMS geospatial team analyzed thousands of square kilometers of satellite imagery of top global ports and created a proprietary technique for allocating risk exposure across port terminals and storage structures. The port Industry Exposure Databases (IEDs) included in the RMS Marine Cargo Model, also incorporate important information on “dwell time,” or how long cargo spends at a given location. This variable, which is critical in determining port accumulations, can be highly influenced by variables such as weather, port automation, import/export ratios, and labor relations.

Covering almost 80 countries and three perils (wind, storm surge, and earthquake), the new marine model will provide 11 high-resolution and 150 medium resolution port industry exposure database, enabling the best insight on cargo vulnerability and global port accumulation currently available to the industry.

The pointed criticism came in the wake of the August 12, 2015 explosions at the Port of Tianjin, which caused an estimated $1.6 – $3.3 billion in cargo damages. It was the second time in three years that the cargo industry had been “surprised”—Superstorm Sandy being the other occasion, delivering a hefty $3 billion in marine loss. Noonan was unequivocal on the cargo market’s need to markedly increase its investment in understanding lines of risk in ports.

Noonan has a point. Catastrophe modeling has traditionally focused on stationary buildings, and marine cargo has been treated as somewhat of an afterthought. Accumulation management for cargo usually involves coding the exposure as warehouse contents, positioning it at a single coordinate (often the port centroid), and running it though a model designed to estimate damages to commercial and residential structures.

This approach is inaccurate for several reasons: first, ports are large and often fragmented. Tianjin, for example, consists of nine separate areas spanning more than 30 kilometers along the coast of Bohai Bay. Proper cargo modeling must correctly account for the geographic distribution of exposure. For storm surge models, whose output is highly sensitive to exposure positioning, this is particularly important.

Second, modeling cargo as “contents” fails to distinguish between vulnerable and resistive cargo. The same wind speed that destroys a cargo container full of electronics might barely make a dent in a concrete silo full of barley.

Finally, cargo tends to be more salvageable than general contents. Since cargo often consists of homogenous products that are carefully packaged for individual sale, more effort is undertaken to salvage it after being subjected to damaging forces.

The Tianjin port explosions killed 173 and injured almost 800. They left thousands homeless, burned 8,000 cars, and left a giant crater where dozens of prosperous businesses had previously been. The cargo industry should use the event as a catalyst to achieve a more robust understanding of its exposure, how it accumulates, and how vulnerable it might be to future losses.

Acts of terror can result in wide ranges of potential damage and the financial repercussions can threaten an insurer’s solvency.

Terrorism risk can be modeled probabilistically with an increasing degree of confidence. Its damages at long return periods are comparable to natural disasters such as hurricanes and earthquakes.

The events of September 11, 2001 resulted in insurable damages in excess of $44 billion, causing insurers to explicitly exclude terrorism from standard property policies. This resulted in the downgrade of billions in mortgage securities, and the costly delay of many important development, construction, and infrastructure projects.

The Terrorism Risk Insurance Act (TRIA)

To address the terrorism insurance shortage, the Terrorism Risk Insurance Act (TRIA) was signed into law by President George W. Bush in 2002, creating a $100 billion federal backstop for insurance claims related to acts of terrorism.

Originally set to expire December 31, 2005, it was extended for two years in December 2005, and again in 2007. The current extension, entitled the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), will expire on December 31, 2014 and its renewal is up for debate in Congress.

Insuring Against Terrorism

Just as with natural catastrophe risk, insurers rely on catastrophe models to underwrite and price terrorism risk.

Terrorism threat is a function of intent, capabilities, and counter-terrorism action; counter-terrorism factors have an impact on frequency, multiplicity, attack type, and targeting of terrorist actions, as well mitigation of loss. It’s not just what the terrorists can do that controls the outcome; it’s what governments can do to counteract their efforts.

RMS was first-to-market with a probabilistic terrorism model and has been providing solutions to model and manage terrorism risk since 2002. The RMS Probabilistic Terrorism Model takes a quantitative view of risk, meaning it uses mathematical methods from game theory, operational research, and social network analysis to inform its view of frequency. Its development involved the input of an extensive team of highly qualified advisors, all of which are authorities in their field of assessing terrorism threats.

The Probabilistic Terrorism Model is made up of four components:

The potential targets (comprised of landmark properties in major cities) and associated attack mode combinations (both conventional and CBRN – chemical biological, radiological, and nuclear), knowing that not every target is susceptible to all types of attack modes.

The relative likelihood of an attack, taking into account the target and type of attack. For example, attacks using conventional bombs are easier to plan for and execute than anthrax releases; locations having high symbolic or economic importance are much more likely to be targeted.

The relative likelihood of multiple attacks making up a single event. For example, a hallmark of many terrorist operations is to attack two or more targets simultaneously. Attack multiplicity modeling is derived based on terrorist groups’ ability to coordinate multiple attacks for a particular weapon type.

Event frequency, which is empirically-driven and determined by modeling three input parameters: the number of attempted events in a year, the distribution of success rate of attempted events, and a suppression factor that is based on government response to an event.

The RMS terrorism model’s damage module has been validated against historical terrorism events. All known terrorist plots or attacks that have occurred since the model’s launch have been consistent with our underlying modeling principles. There are blue ocean opportunities for those willing to understand terrorism risk and underwrite it accordingly.

RMS has released an updated version of its Probabilistic Terrorism Model, which reflects the considerable changes in terrorism risk for Canada, Denmark, Ireland, Italy, and the U.K. as well as the decreased frequency of large-scale-terrorism events for each of the five countries.

To inform the new view of risk, our scientists carried out a comprehensive analysis of global attack and plot data from the past decade. We focused heavily on large-scale attacks – those with the potential to threaten the solvency of an insurer.

The analysis showed that incidents of large-scale attacks have steadily and significantly decreased, which corresponds with a rise in the funding and sophistication of major intelligence agencies in the west.

Our approach to terrorism modeling follows three principles, which have been validated by data on intercepted plots, past successful attacks, and recent intelligence leaks:

Of the estimated 200,000 documents taken or leaked by Edward Snowden, one of the most relevant validations of the RMS model is an N.S.A. presentation that explains the routing of international telecommunications traffic. A very significant proportion of international telecommunications traffic is routed through the U.S. and Europe which, coupled with advances in big data analytics and plummeting data storage costs, has made intelligence collection easier and more robust than it has ever been.

According to available data on the frequency of plots and attacks, the risk of a large-scale attack has been in decline since 2007, but the risk of smaller-scale attacks perpetrated by lone-wolf operatives and homegrown militants remains high.

However, we have learned over the past decade that terrorism risk levels are fluid and can change quickly. With the rise of the Islamic State in Iraq and reports of its successful recruitment of foreigners, as well as ongoing instability in Afghanistan and Pakistan, the risk outlook can change at any moment.

The RMS Probabilistic Terrorism Model incorporates multiple risk outlooks to provide users with the agility to quickly respond to any changes in terrorism risk. RMS is committed to updating its terrorism model as frequently as necessary to provide the most up-to-date, granular, and accurate view of global terrorism risk.

On Thursday, July 17, the Senate passed a reauthorization of TRIA, the Terrorism Risk and Insurance Act, extending the bill for seven years after its expiration at the end of 2014. The bill was passed with a 93-4 vote and made minor modifications to the expiring legislation. This is a promising sign for the insurance industry, which has been lobbying vigorously for a renewal since last year. But before the bill becomes law, there is certain to be opposition from influential members of Congress who favor more significant reductions to the federal government’s participation.

The Senate bill reduces TRIA’s coverage in two key ways: by increasing the industry co-pay from 15% to 20% over a five year period, and by pushing the Federal Government’s “mandatory recoupment” responsibility from $27.5 billion to $37.5 billion. By contrast, a competing bill proposed by Congress calls for even more substantial modifications, most notably raising the program trigger from $100 million to $500 million for all acts of terrorism except those arising from CBRN (chemical, biological, radiological, and nuclear) events.

How the two bills are reconciled will have significant implications for the insurance industry, as any reduction in federal participation will amount to additional risk assumed by insurance carriers. However, property insurers today are more willing to take on terrorism risk that they would have previously excluded, as evidenced by the dramatic drop in terrorism insurance prices over the past decade. A recent study by the Wharton Center for Risk Management downplayed the impact of TRIA changes, noting that while the changes could increase the price of coverage, “firms’ demand for terrorism insurance is not very sensitive to gradual price changes under current market conditions.”

Whatever the case, the ultimate outcome of the TRIA will have a measurable impact on the price and availability of terrorism insurance, primary carriers’ risk appetites in urban areas, and the securitization of terrorism risk, which my colleague Gordon Woo recently wrote about. The U.S. has made great strides in the capability of its counterterrorism operations over the past decade, but even with these gains, insurers and reinsurers must continue managing their pricing, underwriting, and capital deployment strategies to address the risk of future catastrophic acts of terror.

It depends on who you ask. The insurance, real estate, and banking industries are lobbying forcefully for a renewal, citing the difficulty of providing adequate private capacity for terrorism insurance as well as its strong take-up rate (over 60%). On the other side of the debate, some think tanks and consumer advocacy groups believe TRIA should expire because it is an “unwarranted subsidy” that was never meant to be permanent.

Given the advances in risk modeling over the past decade, as well as the recently increased transparency into U.S. counter-terrorism operations, it is now possible to quantify terrorism risk with an ever-increasing degree of certainty.

RMS’ industry-leading terrorism model simulates over 90,000 large-scale terrorist attacks across 9,800 global targets using 35 different attack types. The attacks range from 600-pound car bombs to 10-ton truck bombs as well as chemical, biological, nuclear, and radiological attacks. Based on analyses using high-definition industry-wide exposure, the model results point to several key findings:

More than 75% of the nation’s expected annual loss from terrorist attacks is concentrated around high profile targets in just five urban areas where building value and population density is highest: New York, Chicago, Washington D.C., Los Angeles, and San Francisco.

The financial impacts of terrorist attacks are comparable with severe winter storms and convective storms including tornado, hail, and wind, at return periods commonly used in the reinsurance industry (100, 250, and 500-year return periods). At longer return periods, they are comparable with hurricanes and earthquakes.

Damage from attacks involving chemical, biological, nuclear, and radiological weapons is harder to estimate and far more severe than attacks involving conventional explosives. Several simulated attacks in RMS’ event catalog cause insured losses that approach the surplus level of the entire U.S. insurance industry.

The concentration of loss from a terrorist attack makes it extremely difficult to insure.

The September 11, 2001 attacks caused insured losses exceeding $40 billion, most of which occurred at the World Trade Center—an area of approximately 16 acres. This can be contrasted to Hurricane Katrina’s damage footprint, which spanned large swaths of Mississippi, Louisiana, and Florida. Insurance companies must geographically diversify their risk in order to manage the volatility of their losses; writing terrorism coverage makes this obligation difficult to achieve.

The recent revelations of Edward Snowden have revealed the pervasiveness of these operations. Just as flood insurance covers the breach of flood barriers, terrorism insurance covers the breach of the U.S. countersecurity infrastructure.

When deciding the fate of TRIA, policymakers should make use of the advances in terrorism modeling in order to best estimate the costs and benefits of terrorism legislation.